SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 3, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ----------------------- Commission file number 0-20109 ------------------------------------------------------- Kronos Incorporated - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-2640942 - --------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 Fifth Avenue, Waltham, MA 02451 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (781) 890-3232 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name,former address and former fiscal year,if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- As of May 1, 1999, 12,521,928 shares of the registrant's Common Stock, $.01 par value, were outstanding. KRONOS INCORPORATED INDEX PART I. FINANCIAL INFORMATION Page Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Statements of Income for the Three Months and Six Months Ended April 3, 1999 and April 4, 1998 1 Condensed Consolidated Balance Sheets at April 3, 1999 and September 30, 1998 2 Condensed Consolidated Statements of Cash Flows for the Six Months Ended April 3, 1999 and April 4, 1998 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit Index PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) KRONOS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share and per share amounts) UNAUDITED Three Months Ended Six Months Ended -------------------------------- --------------------------------- April 3, April 4, April 3, April 4, 1999 1998 1999 1998 --------------- -------------- --------------- --------------- Net revenues: Product ..................................... $ 40,643 $ 30,111 $ 73,823 $ 59,872 Service ..................................... 21,043 16,361 40,978 31,173 --------------- -------------- --------------- --------------- --------------- --------------- 61,686 46,472 114,801 91,045 --------------- -------------- --------------- --------------- Cost of sales: Product ..................................... 9,474 7,743 17,313 14,783 Service ..................................... 12,744 10,494 24,857 20,623 --------------- -------------- --------------- --------------- 22,218 18,237 42,170 35,406 --------------- -------------- --------------- --------------- Gross profit 39,468 28,235 72,631 55,639 Expenses: Sales and marketing .......................... 21,676 15,878 40,364 31,929 Engineering, research and development ........ 6,625 4,557 12,628 8,881 General and administrative ................... 3,842 3,317 7,216 6,412 Other (income) expense, net .................. 561 (184) 465 (186) --------------- -------------- --------------- --------------- 32,704 23,568 60,673 47,036 --------------- -------------- --------------- --------------- Income before income taxes ............... 6,764 4,667 11,958 8,603 Provision for income taxes ......................... 2,213 1,783 4,197 3,287 --------------- -------------- --------------- --------------- Net income ............................... $ 4,551 $ 2,884 $ 7,761 $ 5,316 =============== ============== =============== =============== Net income per common share: Basic .................................... $ 0.36 $ 0.23 $ 0.62 $ 0.43 =============== ============== =============== =============== Diluted .................................. $ 0.35 $ 0.23 $ 0.60 $ 0.42 =============== ============== =============== =============== Average common and common equivalent shares outstanding: Basic .................................... 12,595,809 12,412,413 12,541,659 12,348,763 =============== ============== =============== =============== Diluted .................................. 13,069,640 12,791,786 13,019,653 12,726,728 =============== ============== =============== =============== See accompanying notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) UNAUDITED April 3, September 30, 1999 1998 -------------- -------------- ASSETS Current assets: Cash and equivalents ........................................................ $ 17,481 $ 29,888 Marketable securities ....................................................... 21,817 17,501 Accounts receivable, less allowances for doubtful accounts of $1,535 at April 3, 1999 and $1,268 at September 30, 1998 ........................ 50,655 50,904 Deferred income taxes ....................................................... 5,188 5,188 Other current assets ........................................................ 10,175 8,171 -------------- -------------- Total current assets ................................................. 105,316 111,652 Equipment, net ................................................................. 15,542 15,816 Marketable securities .......................................................... 24,350 4,445 Excess of cost over net assets of businesses acquired .......................... 12,045 13,731 Deferred software development costs, net ....................................... 10,922 9,541 Other assets ................................................................... 9,395 8,676 -------------- -------------- Total assets ......................................................... $ 177,570 $ 163,861 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................ $ 7,661 $ 6,427 Accrued compensation ........................................................ 14,556 14,503 Accrued expenses and other current liabilities .............................. 17,226 18,570 Deferred maintenance revenues ............................................... 31,986 27,065 -------------- -------------- Total current liabilities ............................................ 71,429 66,565 Deferred income taxes .......................................................... 911 911 Deferred maintenance revenues .................................................. 11,597 8,830 Other liabilities .............................................................. 279 352 Shareholders' equity: Preferred Stock, par value $1.00 per share: authorized 1,000,000 shares, no shares issued and outstanding Common Stock, par value $.01 per share: authorized 20,000,000 shares, 12,634,728 shares and 12,465,719 shares issued at April 3, 1999 and September 30, 1998, respectively ......................................... 126 83 Additional paid-in capital .................................................. 29,962 29,617 Retained earnings ........................................................... 67,526 59,765 Equity adjustment from translation .......................................... (564) (1,162) Cost of Treasury Stock (138,956 shares and 45,861 shares at April 3, 1999 and September 30, 1998, respectively)............. (3,696) (1,100) -------------- -------------- Total shareholders' equity ........................................... 93,354 87,203 -------------- -------------- Total liabilities and shareholders' equity ........................... $ 177,570 $ 163,861 ============== ============== See accompanying notes to condensed consolidated financial statements. KRONOS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) UNAUDITED Six Months Ended -------------------- April 3, April 4, 1999 1998 -------- --------- Operating activities: Net income ................................................................ $ 7,761 $ 5,317 Adjustments to reconcile net income to net cash and equivalents provided by operating activities: Depreciation ....................................................... 4,105 3,571 Amortization of deferred software development costs and excess of cost over net assets of businesses acquired ........... 4,711 3,010 Changes in certain operating assets and liabilities: Accounts receivable, net ........................................ 257 1,637 Deferred maintenance revenues ................................... 7,736 4,791 Accounts payable, accrued compensation and other liabilities ........................................ 648 (2,837) Other .............................................................. (2,594) (1,751) -------- --------- Net cash and equivalents provided by operating activities .... 22,624 13,738 Investing activities: Purchase of equipment ..................................................... (3,982) (3,000) Capitalization of software development costs .............................. (4,159) (3,023) Increase in marketable securities ......................................... (24,221) (8,921) Acquisitions of businsesses ............................................... (489) (4,360) -------- --------- Net cash and equivalents used in investing activities ........ (32,851) (19,304) Financing activities: Net proceeds from exercise of stock option and employee stock purchase plans ......................................................... 2,140 1,463 Purchase of treasury stock ................................................ (4,347) (27) -------- --------- Net cash and equivalents provided by financing actities ...... (2,207) 1,436 Effect of exchange rate changes on cash and equivalents ........................ 27 (51) -------- --------- Decrease in cash and equivalents .............................................. (12,407) (4,181) Cash and equivalents at the beginning of the period ............................ 29,888 20,698 -------- --------- Cash and equivalents at the end of the period ..................................$ 17,481 $ 16,517 ======== ========= See accompanying notes to condensed consolidated financial statements. 4 KRONOS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - General The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of the Company's financial position and results of operations as of and for the interim periods presented pursuant to the rules and regulations of the Securities and Exchange Commission. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements for the fiscal year ended September 30, 1998. The results of operations for the three and six month periods ended April 3, 1999 are not necessarily indicative of the results for a full fiscal year. Certain amounts have been reclassified in fiscal 1998 to permit comparison with fiscal 1999. NOTE B - Fiscal Quarters The Company utilizes a system of fiscal quarters. Under this system, the first three quarters of each fiscal year end on a Saturday. However, the fourth quarter of each fiscal year will always end on September 30. Because of this, the number of days in the first quarter (94 days in fiscal 1999 and 95 days in fiscal 1998) and fourth quarter (89 days in fiscal 1999 and 88 days in fiscal 1998) of each fiscal year varies from year to year. The second and third quarters of each fiscal year will be exactly thirteen weeks long. This policy does not have a material effect on the comparability of results of operations between quarters. NOTE C - Software Revenue Recognition In November 1997, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 97-2, "Software Revenue Recognition", which the Company adopted in the first quarter of fiscal 1999. The adoption of SOP 97-2 did not have a material effect on the Company's financial statements. NOTE D - Comprehensive Income In September 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130), which the Company adopted in the first quarter of fiscal 1999. SFAS No. 130 establishes standards for reporting comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. For the three and six months ended April 3, 1999 and April 4, 1998, the Company's comprehensive income was as follows (in thousands): Three Months Ended Six Months Ended April 3, April 4, April 3, April 4, 1999 1998 1999 1998 --------- ---------- --------- -------- Comprehensive income: Net income $ 4,551 $ 2,884 $ 7,761 $ 5,316 Cumulative translation adjustment 499 (73) 598 (435) --------- ---------- --------- --------- Total comprehensive income $ 5,050 $ 2,811 $ 8,359 $ 4,881 ========= ========== ========= ========= During the quarter ended April 3, 1999, the Company sold its South African subsidiary to an unrelated third party. As a result of the transaction, the cumulative equity adjustment from translation of the subsidiary's financial statements in the amount of $.5 million was included as a charge to pretax income. NOTE E - Stock Split The Company's Board of Directors approved a three-for-two stock split effected in the form of a 50% stock dividend that was paid on March 9, 1999 to stockholders of record on February 23, 1999. Accordingly, the presentation of shares outstanding and amounts per share have been restated for all periods presented to reflect the split. The par value of the additional shares was transferred from additional paid-in capital to Common Stock. On November 17, 1995, the Company's Board of Directors adopted a Rights Agreement. Under the Agreement, the Company distributed to stockholders a dividend of one Right for each outstanding share of Common Stock. As a result of the stock split, each stockholder has forty four-hundreds of a Right for each share of Common Stock held as of the Record Date. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements This discussion includes certain forward-looking statements about the Company's business and its expectations. Any such statements are subject to risk that could cause the actual results to vary materially from expectations. For a further discussion of the various risks that may affect the Company's business and expectations, see "Certain Factors That May Affect Future Operating Results" at the end of Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Revenues. Revenues for the second quarter of fiscal 1999 amounted to $61.7 million as compared to $46.5 million for the second quarter of the prior year. Revenues for the first six months of fiscal 1999 were $114.8 million as compared to $91.0 million for the first six months of the prior year. Revenue growth was 33% and 26% in the three and six month periods ended April 3, 1999, respectively, as compared to 18% and 19% for each of the comparable periods of the prior year. The revenue growth in the three and six month periods ended April 3, 1999 was principally driven by customer demand in all distribution channels. Product revenues for the second quarter of fiscal 1999 amounted to $40.6 million as compared to $30.1 million for the second quarter of the prior year. Product revenues for the first six months of fiscal 1999 were $73.8 million as compared to $59.9 million for the first six months of the prior year. Product revenue growth of 35% and 23% in the three and six month periods ended April 3, 1999, respectively, increased from 15% in each of the comparable periods of the prior year. Product revenue growth in the three and six month periods ended April 3, 1999 was principally driven by sales of the Company's products to new customers as well as sales into the Company's existing customer base in the second quarter. Contributing significantly to this growth were software revenues that increased 58% in the three month period ended April 3, 1999 as compared to 34% in the comparable period of the prior year. Service revenues for the second quarter of fiscal 1999 amounted to $21.0 million as compared to $16.4 million for the second quarter of the prior year. Service revenues for the first six months of fiscal 1999 were $41.0 million as compared with $31.2 million for the first six months of the prior year. Service revenue growth of 29% and 31% in the three and six month periods ended April 3, 1999, respectively, increased from 23% and 26% for comparable periods of the prior year. The growth in service revenues in the three and six month periods ending April 3, 1999 reflects an increase in maintenance revenue from the expansion of the installed base and an increase in the level of maintenance contracts and professional services accompanying sales to new customers and sales to the Company's existing customer base. Gross Profit. Gross profit as a percentage of revenues was 64% and 62% in the three and six month periods ended April 3, 1999, respectively, as compared with 61% in the comparable periods of the prior year. The improvement in gross profit was evidenced in both product and service gross profit. Product gross profit as a percentage of product revenues was 77% and 76% in the three and six month periods ended April 3, 1999, respectively, increasing from 74% and 75% for the comparable periods of the prior year. The improvement in product gross profit in both periods is primarily attributable to an increased proportion of product revenues generated by software, which typically generates higher gross profit than other products. The software component of product sales increased to 48% and 47% in the three and six month periods ended April 3, 1999, respectively, as compared to 41% and 44% for each of the comparable periods of the prior year. Service gross profit as a percentage of service revenues was 39% in the three and six month periods ended April 3, 1999, respectively, increasing from 36% and 34%, respectively, for comparable periods of the prior year. The increase in service gross profit in both periods is primarily attributable to the growth in service revenues without a proportionate increase in service expenses. This has been accomplished by more fully leveraging service resources and improving the efficiency in the delivery of services. The Company anticipates that service gross profit as a percentage of service revenues should be approximately 38% to 40% over the remainder of fiscal 1999. Expenses. Total operating expenses as a percentage of revenues were 53% in each of the three and six month periods ended April 3, 1999, as compared to 51% and 52%, respectively, in the comparable periods of the prior year. Sales and marketing expenses as a percentage of revenues were 35% in the three and six month periods ended April 3, 1999 as compared to 34% and 35% in the comparable periods of the prior year. Engineering expenses as a percentage of revenues were 11% in each of the three and six month periods ended April 3, 1999, as compared to 10% in the comparable periods of the prior year. Engineering expenses of $6.6 million and $4.6 million in the second quarter of fiscal 1999 and 1998, respectively, are net of capitalized software development costs of $2.2 million and $1.6 million, respectively. Engineering expenses of $12.6 million and $8.9 million in the first six months of fiscal 1999 and 1998, respectively, are net of capitalized software development costs of $4.2 million and $3.0 million, respectively. The growth in engineering, research and development expenses results primarily from the development of new products in the client/server and Windows environments. General and administrative expenses as a percentage of revenues were 6% in the three and six month periods ended April 3, 1999 as compared to 7% in the comparable periods of the prior year. Other (income) expense, net amounted to less than 1% of revenues for all periods presented. Other (income) expense, net is composed primarily of amortization of intangible assets related to acquisitions made by the Company which is offset by interest income earned on its investments. In the second quarter of fiscal 1999, other (income) expense, net also includes an immaterial charge resulting from the Company's sale of its South African subsidiary. This charge relates to the write off of the cumulative equity adjustment from the translation of the subsidiary's financial statements. Income Taxes. The provision for income taxes as a percentage of pretax income was 33% and 35% in the three and six month periods ended April 3, 1999, respectively, as compared to 38% in each of the comparable periods of the prior year. The reduction in the Company's effective income tax rate in both periods is primarily attributable to tax benefits resulting from the Company's sale of its South African subsidiary as well as utilization of foreign net operating loss carryforwards. The Company anticipates the effective income tax rate should be approximately 35% for the remainder of the fiscal year. Liquidity and Capital Resources Working capital as of April 3, 1999, amounted to $33.9 million as compared with $45.1 million at September 30, 1998. The decline in working capital is primarily attributable to the Company's investment of $19.9 million of its cash and equivalents in long term marketable securities. Cash and equivalents and marketable securities increased to $63.6 million as of April 3, 1999 as compared to $51.8 million at September 30, 1998. Cash generated from operations increased to $22.6 million in the first six months of fiscal 1999 from $13.7 million in the first six months of the prior year, principally due to increased earnings and deferred maintenance revenues as well as increases in depreciation and amortization charges. The Company's increase of approximately $1.0 million in its investment in equipment in the first six months of the fiscal year as compared to the same period of the prior year is principally due to increased investments in the Company's engineering and service organizations as well as investments related to the planned relocation of the Company's world headquarters. Cash generated from operations was more than sufficient to fund investments in equipment and capitalized software development costs. In April 1999, the Company acquired a parcel of land located in Chelmsford, Massachusetts for the construction of a new approximately 129,000 square foot world headquarters facility. The Company anticipates it will spend approximately $18.0 million in the construction of the facility over the next 12 months. The Company is also assessing several acquisition opportunities that may be completed over the next three months, although there can be no assurance that these acquisitions will be completed. The Company expects to fund its investments in equipment, software development costs and acquisitions over the remainder of its fiscal year as well as costs related to the construction of the new facility with available cash and investments and operating cash flow. Certain Factors That May Affect Future Operating Results Except for historical matters, the matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company desires to take advantage of the safe harbor provisions of the Act and is including this statement for the express purpose of availing itself of the protection of the safe harbor with respect to all forward looking statements that involve risks and uncertainties. The Company's actual operating results may differ from those indicated by forward looking statements made in this Quarterly Report on Form 10-Q and presented elsewhere by management from time to time because of a number of factors including the potential fluctuations in quarterly results, timing and acceptance of new product introductions by the Company and its competitors, competitive pricing pressures, the dependence on alternate distribution channels, potential effects of the century change, the ability to attract and retain sufficient technical personnel, and the dependence on the Company's time and attendance product line and on key vendors, as further described below and in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, which factors are specifically incorporated by reference herein. Potential Fluctuations in Quarterly Results. The Company's quarterly operating results may fluctuate as a result of a variety of factors, including the timing of the introduction of new products and product enhancements by the Company and its competitors, market acceptance of new products, mix of products sold, the purchasing patterns of its customers, competitive pricing pressure and general economic conditions. The Company historically has realized a relatively larger percentage of its annual revenues and profits in the fourth quarter and a relatively smaller percentage in the first quarter of each fiscal year, although there can be no assurance that this pattern will continue. In addition, while the Company has contracts to supply systems to certain customers over an extended period of time, substantially all of the Company's product revenue and profits in each quarter result from orders received in that quarter. If near-term demand for the Company's products weakens or if significant anticipated sales in any quarter do not close when expected, the Company's revenues for that quarter will be adversely affected. The Company believes that its operating results for any one period are not necessarily indicative of results for any future period. Product Development and Technological Change. Continual change and improvement in computer software and hardware technology characterize the markets for frontline labor management systems. The Company's future success will depend largely on its ability to enhance its existing product lines and to develop new products and interfaces to third party products on a timely basis for the increasingly sophisticated needs of its customers. Although the Company is continually seeking to further enhance its product offerings and to develop new products and interfaces, there can be no assurance that these efforts will succeed, or that, if successful, such product enhancements or new products will achieve widespread market acceptance, or that the Company's competitors will not develop and market products which are superior to the Company's products or achieve greater market acceptance. Competition. The frontline labor management industry is highly competitive. Competition is increasing as competitors in related industries, such as human resources management, payroll processing and enterprise resource planning (ERP) enter the market. Advances in software development tools have accelerated the software development process and, therefore, can allow competitors to penetrate certain of the Company's markets. Maintaining the Company's technological and other advantages over competitors will require continued investment by the Company in research and development and marketing and sales programs. There can be no assurance that the Company will have sufficient resources to make such investments or be able to achieve the technological advances necessary to maintain its competitive advantages. Increased competition could adversely affect the Company's operating results through price reductions and/or loss of market share. Dependence on Alternate Distribution Channels. The Company markets and sells its products through its direct sales organization, independent dealers and OEMs. For the fiscal year ended September 30, 1998, approximately 20% of the Company's revenue was generated through sales to dealers and OEMs. Reduction in the sales efforts of the Company's major dealers and/or OEMs, or termination or changes in their relationships with the Company, could have a material adverse effect on the results of the Company's operations. Year 2000. The Company has an executive level steering committee to identify and resolve Year 2000 issues associated with the Company's internal systems (both information technology ("IT") and non-IT), the Company's own products and services, the status of third party products distributed by the Company to its customers as well as the Year 2000 readiness of the Company's suppliers. The Company has completed an assessment of all of its principal IT systems, which include manufacturing, distribution, customer service and financial systems. The Company has, with the assistance of an outside consultant, tested its principal internal enterprise resource planning (ERP) system and believes it to be year 2000 compliant. This ERP system includes order entry, material resource planning, master production scheduling, purchasing, shipping and financial systems. The Company has identified Year 2000 issues in other less significant IT systems, and expects to resolve those issues, by replacements and/or upgrades, by mid-1999. The Company is currently performing an assessment of certain non-IT systems and expects that assessment to be completed by mid-1999. Examples of these non-IT systems include the Company's telephone systems. The Company will replace prior to the end of October, 1999, certain stand alone shop floor test equipment to ensure year 2000 compliance. The Company does not plan to assess specifically its facility management systems, or the external forces such as utility or transportation Year 2000 compliance failures that might generally affect industry and commerce. Although the Company is not currently aware of any material operational issues or costs associated with preparing its internal IT and non-IT systems for the Year 2000, the Company may experience material unanticipated problems and costs caused by undetected errors or defects in these internal systems. The Company's Year 2000 compliance plan includes designing its current products to meet the Company's definition of "Year 2000 Compliant" and testing the most recent versions of its current products to determine whether they meet that definition. Testing of products currently manufactured by the Company is approximately 95% completed and is expected to be finished by the end of June 1999. The Company has warranted, and may in the future warrant to certain customers that its products will work in the Year 2000 and beyond. Generally, for products that have been identified to date as needing upgrades/new versions to address Year 2000 issues, the Company has those upgrades/new versions available to customers for purchase or under maintenance agreements. One of the Company's products, which was sold in low volumes, has a Year 2000 deficiency for which there is no upgrade/new version currently available, but the Company intends to correct that deficiency in the product's next maintenance release. Some of the Company's customers are using products and/or product versions that the Company has not tested, and does not support, for Year 2000 compliance. The Company is encouraging these customers to migrate to current products/versions that meet the Company's Year 2000 compliance definition. It is possible that the Company may experience increased expenses in addressing migration issues for these customers. In addition, the Company does not intend to test any of its custom software products for Year 2000 compliance. For third party products that the Company distributes with its products, the Company has sought information and assurances from the manufacturers concerning those products' Year 2000 compliance status. As a result, the Company has identified certain third party products that will require an upgrade to be Year 2000 compliant and is currently notifying affected customers and encouraging them to upgrade. The Company expects to complete its assessment of those third party products by mid-1999. Despite the testing of its own products and efforts to obtain assurances on third party products, errors or defects in such products could result in delay or loss of revenue, diversion of development resources, damage to the Company's reputation, or increased service and warranty costs, any of which could materially affect the Company's business, results of operations, or financial condition. In addition, the unprecedented nature of potential litigation regarding Year 2000 compliance issues makes it uncertain whether the Company will be affected by such litigation. The Company has completed its systematic inquiry of key suppliers to assess their Year 2000 readiness. The Company is not aware of any problems that would materially affect its business, results of operations or financial condition, but the Company has no means of ensuring that assurances received from such suppliers are accurate. The inability of such suppliers to meet Year 2000 requirements could materially impact the ability of the Company to procure material from these suppliers and to meet its obligations to supply products to its customers. The Company does not currently have any information concerning the Year 2000 compliance status of its customers. As with other similarly situated companies, if the Company's current or future customers fail to achieve Year 2000 compliance or if they divert expenditures to address Year 2000 compliance problems, the Company's business, results of operations, or financial condition could be materially affected. The Company has not yet developed a contingency plan on Year 2000 readiness. The Company is currently assessing the need for such a plan and anticipates completing that assessment by mid-1999. The costs associated with the Company's Year 2000 plan have been funded from operating cash flows and have been charged to operations. To date, the Company has incurred approximately $.8 million of incremental costs and expects, on a cumulative basis, total costs to be approximately $1.2 million to address its internal IT and non-IT systems and to address Year 2000 compliance problems in its own products and in third party products distributed with its products. The Company does not separately track the internal costs associated with its Year 2000 plan, which are primarily payroll costs for its information systems employees, support and technical personnel and the Year 2000 steering committee. The costs described herein, and the costs to accomplish the other elements of the Company's Year 2000 plan, have not been and are not expected to be material to the Company's financial position, results of operations or cash flows. The cost of completing the Year 2000 plan and the date on which the Company believes the plan will be complete are based upon management's best estimates derived by using numerous assumptions of future events, including the continued availability of certain resources. There can be no guarantee that these estimates will be achieved and the actual results may differ materially from those anticipated. Specific factors that might cause these differences include without limitation, the availability and cost of personnel trained in this area, the ability to make timely and appropriate adjustments to all relevant computer codes and similar uncertainties. Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. (a) The 1999 Annual Meeting of Stockholders of Kronos Incorporated was held on January 29, 1999. (b) At the Annual Meeting, Messrs. D. Bradley McWilliams and Lawrence Portner were elected as Class I Directors for three-year terms expiring in 2002. In addition, the Directors whose terms of office continue after the meeting are three Class III Directors: Messrs. Mark S. Ain, Richard J. Dumler and Samuel Rubinovitz and one Class II Director: Messr. W. Patrick Decker. The tabulation of votes for each Director nominee was as follows: FOR WITHHELD D. Bradley McWilliams 7,499,050 6,230 Lawrence Portner 7,498,993 6,287 (c) The other item voted upon at the meeting was as follows: BROKER FOR AGAINST ABSTAIN NON-VOTES Ratification of the selection of Ernst & Young LLP 7,488,945 14,983 1,352 ----- Item 6. Exhibits and Report on Form 8-K (a) Exhibit 10.1 Lease Agreement Between W/9TIB Real Estate Limited Partnership, as Landlord, and Kronos Incorporated, as Tenant Dated February 26, 1999. 10.2 Contruction Agreement Between Cranshaw Construction of New England Limited Partnership and Kronos, Inc. Dated March 10, 1999. 10.3 Agreement of Purchase and Sale By and Between W/9TIB Real Estate Limited Partnership and Kronos Incorporated Dated March 29, 1999. 27 Financial Data Schedule (b) Reports of Form 8-K There were no reports on Form 8-K filed during the fiscal quarter ended April 3, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KRONOS INCORPORATED By /s/ Paul A. Lacy Paul A. Lacy Vice President of Finance and Administration (Duly Authorized Officer and Principal Financial Officer) May 18, 1999 KRONOS INCORPORATED EXHIBIT INDEX Exhibit Number Description 10.1 Lease Agreement Between W/9TIB Real Estate Limited Partnership, as Landlord, and Kronos Incorporated, as Tenant Dated February 26, 1999. 10.2 Contruction Agreement Between Cranshaw Construction of New England Limited Partnership and Kronos, Inc. Dated March 10, 1999. 10.3 Agreement of Purchase and Sale By and Between W/9TIB Real Estate Limited Partnership and Kronos Incorporated Dated March 29, 1999. 27 Financial Data Schedule